New IRS Notification Requirement and Other 501(c)(4) Provisions Become Law
The omnibus appropriations and “tax extender” bills that were signed into law in December contained a series of sundry legislative riders, many of which were responses to allegations of the IRS’s recent mistreatment of 501(c)(4) social welfare and advocacy organizations. As a result of these provisions:
- Newly formed 501(c)(4) organizations will be required to notify the IRS of their operation within 60 days, while certain existing organizations that formed recently must notify the agency by June 15, 2016. In return, the IRS will issue an acknowledgement of the filing to those organizations.
- All 501(c) organizations (instead of only 501(c)(3) organizations) that apply for determination by the IRS of their status will be able to seek expedited judicial review if the IRS delays the determination.
- The IRS is barred from issuing the anticipated new regulations, as well as any revenue rulings, or other guidance on political activity by 501(c)(4) organizations during the 2016 fiscal year.
- The IRS is permanently barred from applying the “gift tax” to donors to 501(c)(4) organizations.
New 501(c)(4) IRS Notification and Documentation Requirement. Newly formed 501(c)(4) entities are now required to notify the IRS of their intent to operate as such within 60 days after they are established. Per a recent IRS bulletin, the 60-day deadline will go into effect once the IRS has issued new regulations to implement the legislation. The notification must include the organization’s name, address, taxpayer identification number, the date and the state under whose laws the entity was organized, and a statement of the organization’s purpose. The IRS is required to provide the organization with an acknowledgment of the agency’s receipt of the notification within 60 days thereafter. The IRS is authorized to charge organizations a “reasonable user fee” for the submission.
Existing 501(c)(4) entities that have not applied to the IRS for a formal determination of their tax-exempt status, and that also have not filed their first tax return yet, are required to notify the IRS of their operation within 180 days of the December 18, 2015 date the “tax extenders” bill was signed into law (i.e., by June 15, 2016).
Failing to file the initial notification can result in penalties of $20 per day, up to a maximum of $5,000. Along with its first tax return, a newly formed 501(c)(4) organization also will be required to submit any supporting information the IRS may require by regulation to demonstrate the organization is operating appropriately under Section 501(c)(4) of the tax code.
Prior to the new notification requirement, 501(c)(4) entities that chose to forgo the formal process for IRS recognition of their tax-exempt status were permitted to “self-declare” and operate as 501(c)(4) entities and simply file their annual tax returns with the IRS.
While the new notification requirement may create an additional administrative burden for newly formed 501(c)(4) entities in many instances, it also may confer a certain imprimatur of IRS approval or acknowledgment for entities that otherwise would have “self-declared” without going through the entire process of applying for a formal determination of their tax-exempt status by the IRS. Nonetheless, the formal determination process is still available for entities that may wish to receive additional agency assurances that their contemplated activities are appropriate for 501(c)(4) entities or need a determination for state law compliance or other purposes. Any 501(c)(4) organization that is considering whether to apply for a formal IRS determination should consult with Wiley Rein’s Election Law practitioners, who routinely obtain IRS determinations on behalf of clients, to discuss whether this is the best option.
At this time, the IRS has not provided a timeframe for when the new notification forms are expected to be available, or when the implementing regulations are expected to go into effect.
Expedited Judicial Review for Determination Requests. Any 501(c) organization that submits a request for determination by the IRS confirming its tax-exempt status may now seek a declaratory judgment from the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia if the IRS fails to act on the request within 270 days of when it is submitted. The expansion of this expedited judicial review process for IRS determinations, which previously had been available only to 501(c)(3) and certain other entities, is apparently a response to the substantial delays by the IRS in processing certain 501(c)(4) determinations, which the agency first acknowledged in 2013.
501(c)(4) Political Activity Regulations Put on Ice. For Fiscal Year 2016, the IRS is now effectively prohibited from “issu[ing], revis[ing], or finaliz[ing] any regulation, revenue ruling, or other guidance” of general applicability “relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4)” of the tax code. Despite the broad language of this provision, its principal aim appears to be directed at the proposed rulemaking the IRS released in November 2013, which sought to clarify the types of activities the IRS would regard as being political campaign intervention, and therefore restricted, for 501(c)(4) organizations.
After the IRS received approximately 160,000 comments, the vast majority of which opposed the proposed rule for being overly restrictive, the IRS withdrew the rulemaking. Several times since the withdrawal, the IRS has indicated that it nonetheless intended to revise the proposed rule as early as 2016, and to possibly also broaden it to apply a more uniform standard for defining political activity for all types of 501(c) organizations and for 527 political organizations as well. While many critics generally fault the current IRS standards on political campaign intervention as being excessively vague, the legislative action to block the IRS from issuing new regulations reflects a widespread view that the agency would probably make its existing standards even worse with a new rulemaking.
501(c)(4) Donations Freed from Gift Tax. The “tax extenders” bill permanently prohibits the IRS from applying the 40 percent “gift tax” to certain donors who give to 501(c)(4) social welfare/advocacy organizations, (c)(5) labor unions, and (c)(6) trade associations. Under the preexisting law, donations to 501(c)(3) organizations and 527 political organizations have not been subject to the gift tax, but the tax treatment of donations to 501(c)(4) entities has been unclear. In 2010, the IRS investigated several donors to 501(c)(4) organizations on the basis that they may have failed to pay the gift tax on their donations. While the IRS subsequently backed away from its posture, the legislation enacted last month clarifies once and for all that donations to 501(c)(4), (c)(5), and (c)(6) organizations are not subject to the gift tax.